That moment you get your first offer on your home — a good one at that — ah, it can feel like a Captain America-size weight has been lifted. But strap in because there are still milestones to meet before your deal is legally binding. Those milestones are called contingencies.
By definition, a contingency is a term that has to be met in order for the sale to finalize. While a buyer could technically make their purchase contingent on just about anything in their offer letter (asking to keep your furniture for example), there are a few standard contingencies common with most sales. The home inspection is one example. The appraisal is another.
You may know what an appraisal itself is, but it also helps to know the ins and outs how the appraisal can affect the sale of your house. So let’s dive into what this appraisal contingency is, how it works, and what it can mean for you as a seller.
What is an appraisal contingency?
In a nutshell, the appraisal contingency requires that a third-party appraiser assesses the current value of your home so that the buyers (and the lender) know they’re not overpaying. That way, if the buyer loses their job in a year and needs to turn around and sell the home, they know they’ve bought it at market value and likely won’t be underwater when it comes time to list themselves.
If you owned a clothing store, you wouldn’t buy jeans for $200 if you could only sell them for $50. That’s how home buyers are looking at your listing. Similarly, the bank doesn’t want to (and won’t) loan buyers more money to purchase a house than that house is worth, that magic number that comes back in your appraisal report.
So like it or not, as long as your buyers are financing their purchase (and 86% of home buyers do according to the National Association of Realtors), the lender will require an appraisal before the deal can be closed. It’s standard in any purchase contract that isn’t a cash deal.
What does the process look like?
Once you accept an offer on your home, the buyer has 30 to 45 days to lift all contingencies depending on what you agree on for a close date, and that includes ordering the appraisal. Your contract may stipulate that the appraisal has to be done sooner than that. Oriana Shea, a top-selling agent in Long Beach, California, says a 17-day appraisal deadline is standard for her area.
The buyer’s lender will order the appraisal, always by a third party company. After the appraiser pays you a visit to evaluate your property and its features and upgrades, your buyer will receive the appraisal report in about a week. If it comes back at or above the agreed sale price, the contingency is lifted. The deal moves forward.
Here comes the but. Remember, the bank will only loan the buyer the appraised value. So if the appraisal comes in below the agreed sale price, the appraisal contingency in your contract gives your buyers an out. If you don’t come down on price, they can choose to come up with the difference out of pocket or they can walk away from the deal with their earnest money. For you the seller, that means your home goes back on the market and it’s back to square one.
How common are appraisal problems?
Appraisal and real estate experts we spoke with estimated that appraisals come in low anywhere from 10%-20% of the time. This is why it’s important to price your home correctly. “The market will determine whether your home is worth the price that you put it at,” says Shea, who’s been in the business for 23 years. Consider the appraisal a cold, hard reality check that will bring you back down to market value if you’ve insisted on a higher price that doesn’t have the comps to back it.
While appraisal issues can arise when sellers have their heads in the clouds, thinking their upgrades are worth more than they actually are, Shea explains low appraisals tend to be more common in a competitive area where eager buyers are the ones driving the market up.
Scenario: A property priced at $699,000 receives multiple offers that bid it up to $745,000. Great news! But if the appraiser can’t find at least three comparable sales to support $745,000 and the buyer is financing the deal, the bank will not loan them the full amount. The property still has to prove itself to the powers that be.
Buyers in these cases are hopefully working with experienced agents who have either found comps to back up the higher bid or have educated their buyer on the risks — that they may have to come up with the difference out of pocket.
The appraisal came in under contract. Now what?
So what does all this mean for you, the seller? While a low appraisal can seem like a deal killer, that’s not necessarily the case. Fannie Mae reports that when appraisals come in low, the sale is either canceled or delayed 32% of the time while the price is lowered to complete the sale 51% of the time.
The buyer’s knee-jerk reaction to a low appraisal will be to ask you to come down on price. In a competitive market where you have backup offers, you don’t have to say yes. You can move on to the next buyer in your pile. But if your home isn’t in a seller’s market with high demand and this is your only offer, it’s best to make it work if you can.
“More times than not, I can say that I’ve had the buyer and the seller meet halfway,” says Shea. In competitive markets, she explains that some buyers will try to make their initial offer more attractive upfront by including the amount they’re willing to pay out of pocket should the home not appraise — in which case the appraisal contingency isn’t such a barrier for sellers.
Multiple offers or not, your ideal buyer — aside from a cash buyer which voids the need for an appraisal — is someone putting down 20% or showing proof of funds. This hints that they have strong personal finances, and potentially the extra money to pay more out of pocket if the appraisal comes back low. “That’s your best situation because now if you have a discrepancy between the appraised value and the price that all the parties have agreed to, you’re more likely to have a buyer that’s willing to work with you,” explains Shea.
Is it possible to get around the appraisal contingency?
If you don’t want to worry about the appraisal, your best bet is to find a cash buyer. Because cash buyers aren’t seeking a loan from the bank, they aren’t required to get an appraisal done to obtain the funds. HomeLight’s Simple Sale platform can give you an idea of what an instant, pre-approved cash buyer would pay for your home versus what an experienced agent thinks you could get on the open market.
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In the latter case, if your agent thinks there could be an appraisal problem with an offer you’ve received, they might recommend you ask the buyer to waive the appraisal contingency in your counteroffer if it’s a competitive market. “If you have a buyer that you know can cover [any difference in the sale price and appraised value] and the buyer wants the property badly enough, they’ll typically waive the appraisal contingency,” says Shea. But what if you don’t expect to have multiple offers?
What can sellers do to help ensure their property appraises?
You don’t have to simply list your home and cross your fingers that it all works out. There are ways to increase the chances of attracting a full price offer, and of making sure that number is validated in your appraisal.
Price it right.
Knowing your home’s value is the first step. Before you list, get a free estimate using HomeLight’s Home Value Estimator, and work with your agent on a comparative market analysis. Getting familiar with the comps will help you determine a realistic sale price that won’t raise red flags with an appraiser. While pricing it high seems like the way to make the most money, it can actually result in your listing sitting longer and having to sacrifice more on your bottom line.
Show the appraiser you’ve done your homework.
While the appraiser is an independent third party, meant to be unbiased, your agent can make sure they have a market analysis so they know why you’ve priced your home the way you have. “I always meet the appraiser at my listing,” says Shea. She wants to make sure the appraiser sees the comparable properties she’s looked at to justify the price. Many agents don’t do this, so it’s a good reminder to find an agent who has an above-average track record to navigate complicated contingencies like this.
The bottom line
While a full price offer can send your mind straight to “pop the champagne, break out the boxes, and let’s get packing,” the reality is your buyer still has a few opportunities to rescind their offer before the deal is done. A good agent will help you minimize this risk at every turn — whether that’s by helping to fetch you a contingency-free offer, or making sure your home appraises with flying colors thanks to a spot-on pricing strategy.
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